LTC Needs a Plan C: Long term care insurance deals start with optimism but face regulatory scrutiny & price, cash challenges

Jan. 5, 2020 —

Long term care insurers have valiantly awaited help with buyouts, risk transfer deals and block purchases but that process has been slow or stymied. Help may not be on the way anytime soon.

Genworth Financial‘s one-time financial rescue by China Oceanwide is on the rocks with no closing seen anytime soon, HC2 Holdings is interested in possibly shedding Continental General Holdings LLC in a bid for cash as it unloads other subsidiaries and potential deals involving insurers’ LTC books of business have been put on hold because of the gap between bid and ask prices, according to sources.

Genworth is hosting a call today to discuss moving forward with its contingencies plans including a likely partial IPO of its sturdy mortgage insurance business to address looming debt, which has been on the table since at least this summer as the pending status of the Oceanwide merger, announced in October 2016, neared its fourth year.

Cash availability issues for the $2.7 billion acquisition by the Chinese financial conglomerate appeared to surface soon after Genworth cleared most, if not all , of its state, federal and international regulatory hurdles through approvals and divestments, a time that also coincide with the Covid-19 pandemic. Oceanwide had been trying to secure $1.8 billion in offshore financing from private equity firm Hony Capital since late summer, and then trying to show Genworth the money would come soon as the merger went through a series of extensions, the latest ending Dec. 31 with no renewal this time.

Oceanwide’s real estate arm has been facing financial challenges, with lawsuits and liens filed against it in California.

The San Francisco Business Journal recently reported on a $14.6 million lawsuit filed in November against Oceanwide Holdings and its general contractors for its centering on Oceanwide’s planned San Francisco mixed use tower. This long-standing, unfinished project was reportedly for sale, to be acquired by Hony Capital for $1.2 billion purchase, a deal anticipated to close a couple of times last year, most recently on Dec. 31. It did not, the Business Times wrote. The newspaper instead reported Jan. 4th that Hony bid’s to buy Oceanwide Center “unravels as deadline to close sale is not extended.”

The business paper said it is “unclear whether there is a path forward for Oceanwide and buyer Hony Capital,” and that “Oceanwide said both parties will ‘continue to explore other cooperation opportunities.'”

Likewise, for the LTC deal, no one is giving up, yet, on paper. LU Zhiqiang, chairman of Oceanwide, remained optimistic for acquiring Genworth in a press release Jan. 4. “We believe the value of the transaction is significant for both parties’ stakeholders, and are continuing to work towards completing the transaction with Genworth,” he said.

In concert with the San Francisco real estate woes, a planned Los Angeles Oceanwide residential and retail building remains also unfinished, and is facing $211.7 million in mechanics liens, according to According to a Levelset article posted in late August, building contractors were owed “nearly $240 million as of July 2020 while in San Francisco, unpaid work claims have reached close to $50 million as of early July 2020.”

Back in June, given the delays brought about by the Covid-19 pandemic coupled with the need for the firming of overseas financing as U.S. regulatory approvals cleared, Genworth began talking about seeking “evidence” of financing abilities from its partner, China Oceanwide.

Specifically, a June 30 press release by the Richmond-based insurer said it expected to see by Aug, 21 that Oceanwide could give it $1 billion from within Mainland China and $1 billion from outside China from Hony Capital or other acceptable third parties to fund the deal. This dance on funding the deal continued throughout the late summer and the fall.

Hony said it has no comment on the deal for now in an email.

Meanwhile, HC2, after acquiring LTC properties such has Continental and then Humana‘s South Carolina LTC business Kanawha Insurance Co. in 2018, is now entertaining an offer for Continental from a director and beneficial owner of the company, Michael Gorzynski for about $90 million, subject to certain adjustments, consisting of, among other things, a combination of $65 million in cash, according to the indication of interest filed with the Securities and Exchange Commission Dec. 10.

It is unclear if regulators will approve this proposed purchase by a director. HC2 and Continental have faced lawsuit activity involving a whistleblower in their LTC businesses, although former hedge fund impresario Phil Falcone has since departed the investment company.

There is at least one other firm potentially waiting in the wings to see how the situation develops, but the cash needed to take on LTC and its ever-deepening reserve issues after years of underpricing and high utilization, is an overriding issue, according to one source.

Other opportunities for LTC include risk-transfer deals, but although chatter on these arrangements marked much of 2020, potential deals now appear dormant due to a wide price gap between pricing between sellers and buyers, according to a market source.

However, not all agree with such cautionary notes.

“Risk transfer discussions are picking up, making it possible that deals could be announced for the first time in over two years,” wrote equity analysts at Evercore ISI in mid-December after meeting with a leading consulting actuary on the subject.

The analysts pointed to late 2021 as a probable time frame, and said partial risk transfer deals are also on the table for companies with larger blocks, where a full risk transfer real might cost too much in terms of dilution.

Evercore, in its research note, extolled greater transparency and understanding of morbidity assumptions taken by insurers because of new actuarial standards instituted by state regulators. The required adjustments help put policies and reserving practices “on an apples to apples basis,” among companies, Evercore said. However, the new, more informed scrutiny from regulators could result in a need for some LTC insurers to plump up their reserves despite the claims improvement engendered by the Covid pandemic, according to the analysts.

Time will tell, but although LTC insurers are now securing premium increases on a more regular fashion from more state regulators, reserve holes loom and there are a few ongoing LTC insolvencies that continue to haunt involved parties and current policyholders.

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